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Tuesday, July 2, 2013

Real estate investors are holding large inventories

Economic improvement and low mortgage rates have increased demand for real estate
Low housing inventory has increased home prices
By  Kamiel Moore

Very few people could secure the necessary financing to purchase a home during the Great Recession. Some lost their jobs and watched their good credit disappear. Others decided to wait until the future seemed more certain. Still others decided to bow out of the market completely because owning a home is a huge responsibility.

Demand is growing

The economy is turning around. Many of the people who took themselves out of the market during the recession are returning. Demand for houses hasn’t been this high in years. Prices are rising again. Prices are getting downright “bubbly” in many areas.

Supply is low

An asset bubble is created by extreme demand combined with low supply. Although demand is growing, supply has to grow at roughly the same rate in order to avoid another asset bubble in housing. The fact of the matter is home inventories aren’t growing anywhere near fast enough to meet demand. And there’s a good reason for why this is happening as the economy recovers.

It’s because investors bought a ton homes

But they’re not selling them. They’re renting them to all of those people who put off buying a house during the recession. Investors ended up buy a lot of the houses first-time buyers would have bought otherwise.

Many people chose to rent during the Great Recession. During uncertain, trying times it makes sense to rent. If something breaks, you’re not on the hook for the bill. The most complicated thing you’ll ever have to do to fix something is make a call to your landlord. Sometimes you have to call twice, but that’s about as difficult as it gets for people who rent.

Huge players

Blackstone Group, the country’s largest private equity firm, started buying single family homes in 2007 and didn’t stop until prices started going up again. They ended up with 20,000 single-family homes in their portfolio. And they’re not interested in selling them because they’re making money fist-over-fist renting them out. Colony Capital bought 7,000 single family homes when prices were depressed. Now, most of the major players in this space are claiming “the numbers don’t make sense” to keep buying, given current prices.

Don’t wait to buy

Investors have plenty of houses in their inventories and don’t play on selling them in the open market anytime soon. They would rather not go without the revenue renting them out creates. Demand will is likely to stay strong, and inventories aren’t going to keep up. Baring some kind of unforeseen financial or economic disaster, the bond market is the only thing that will keep home prices in line. The rate on the 10-year treasury note upon which mortgage rates are based started moving higher during the middle of last year. Since then it’s gone from a 1.4% yield to a yield greater than 2.5%.

Can you imagine what it will do to home prices if the rate upon which mortgages are based doubles from here? Assuming demand keeps increasing and supplies stay the same, bonds could be the only thing keeping the housing market from turning into another bubble.  

About the author: Kamiel Moore is a real estate expert who works for HomeVestors. She lives in Houston and loves cupcake shops, air conditioning, reality TV and trips to the beach.

Image license: ©A.W. Berry; licensed for use

1 comment:

  1. Every time I needed to contact my property manager, he's always professional and on top of things. I have so many great things to say about the real estate company I hired.